Glitch Weekly: How crypto became a political football
Glitch Weekly: How crypto became a political football
A tale of two DC crypto conferences
Happy Friday! It’s been hard to ignore how political the issue of cryptocurrency has become lately. Why has this happened? Two crypto conferences this week in DC provided useful insight.
Back-to-back gatherings in Washington showed how crypto contains multitudes
It was the ETH of times, it was the Blockchain Summit of times. Two crypto cons on back-to-back days in Washington DC this week were a study in contrasts, and a statement about the ways in which this burgeoning land we call “crypto” contains multitudes.
The scene at Tuesday’s inaugural ETH DC was devoid of suits, and free from politicians. Most of the talks were focused on technology and business-related topics relevant to crypto software developers and founders—“builders” in industry parlance.
But it was impossible to ignore the elephant in the room.
“You just can’t get around the (policy) environment we have in the space right now,” Gerald Gallagher, who helped put on the event as a “steward” for an organization called DC DAO, said as he introduced one of the few policy-focused panels of the day.
Gallagher, who also works as general counsel for a crypto startup called Sei Labs, has seen first-hand how hostile the environment has become. Over the past two years, a slew of proposed rules and enforcement actions by US regulators, particularly the Securities and Exchange Commission (SEC) and the Department of Treasury, has left developers and entrepreneurs in the dark about what is and isn’t allowed. Recent criminal prosecutions by the Department of Justice have them legitimately wondering if building any sort of crypto software could end up landing them behind bars.
It’s not just the regulators. Some members of Congress, mainly Democrats and most prominently Senator Elizabeth Warren of Massachusetts, apparently sense they can score political points by painting crypto as harmful to consumers and national security. Warren’s rhetoric seems intended to frame the entire industry as vaguely criminal. Last year, for example, Politico reported that Warren was “building an anti-crypto army” in DC. She’s also proposed legislation that would impose strict reporting requirements on crypto software developers and network validators—rules that critics argue would be an unconstitutional attack on civil liberties.
Everyone knows the cryptosphere has its fair share of bad actors. But anyone who has been to a crypto event like ETH DC can see that the industry is also filled with earnest nerds who are passionate about the idea of a financial system free of gatekeepers and middlemen, and an internet where individuals have the technical power to own and control their data. They believe that what they are building can be genuinely good for society.
From the perspective of the federal government, things aren’t that simple. “The US government is responsible for ensuring the security of the nation and its citizens,” Bill Hughes, senior counsel and director of global regulatory matters at the Ethereum software company Consensys, said during a panel earlier in the day. “How do you do that in a system which is purposefully permissionless such that the bad guys can use it just as much as the good guys?”
Nowhere is that question more urgent than in the case of the Ethereum-based privacy application Tornado Cash, which we’ve discussed many times in this newsletter. The bad guys in this case are the Lazarus Group, a North Korean state-backed hacking unit. According to the US government, the group ran hundreds of millions of dollars of stolen crypto through Tornado Cash to throw investigators off their trail.
Although Tornado Cash’s core blockchain-based software cannot be controlled, modified, or shut down by anyone—and is still functioning—two of its developers have been arrested. On the same day as ETH DC, a Dutch judge sentenced Tornado Cash developer Alexey Pertsev to 64 months in prison for money laundering. Fellow developer Roman Storm is scheduled to go to trial in September in the US on charges of money laundering and violating sanctions law. Pertsev and Storm both argue all they did was create a software tool and that others then used it to break the law.
This situation also reflects how the US national security apparatus may be uniquely threatened by permissionless systems like Tornado Cash. America dominates the global financial system. The dollar is the world’s reserve currency. Most of the money moving around the world must pass through a US bank. That gives America the power to ban adversaries like North Korea through the use of economic sanctions. An alternative set of financial rails that makes it possible for North Korea and others to circumvent sanctions undermines that power.
“Politics is politics”
That brings us to Wednesday’s DC Blockchain Summit. For all that ETH DC was a loose, candid discussion amongst people who think of themselves as builders, the Summit was swanky and replete with members of the political establishment—a classic beltway shindig.
Exhibit A: Dennis Kucinich, the former Democratic Congressman from Ohio who is now running again (though as an Independent). During a panel of “pro-crypto” Congressional candidates, he said he views the creation of Bitcoin by Satoshi Nakamoto as an “epochal” turning point in human history. “Just as in 1543, Copernicus’s heliocentric view of the world threatened the establishment at that time, so too does Satoshi’s Bitcoin theory and thinking threaten a monetary establishment which will brook no new dissent, no new possibilities,” he said.
Texas Senator Ted Cruz even made an appearance, wasting no time before calling Warren’s anti-crypto stance a “Marxist” attack on freedom. “There are voices in our political process that want to actively monitor every single transaction Americans make,” he said.
John Deaton, who is opposing Warren in a race for her Senate seat this fall, blamed her for turning crypto into a partisan issue by making it a focus of her campaign. “I call her the crypto candidate,” said Deaton, who joined Kucinich on the panel of pro-crypto candidates. “I’m a pro-freedom candidate, and digital assets are just like any other property—you have a right to own them, and her attempt to ban it is disgraceful.”
Sure, crypto is a thorny philosophical idea for policymakers to grapple with, and that’s part of why many US policymakers have been reluctant to embrace it. But amid the divisive talking points and political red meat at the DC Blockchain Summit, a simpler theory emerged for why crypto has become so polarizing in DC.
During a speech later in the day, former Commodities Futures Trading Commission chair J. Christopher Giancarlo reflected on his time in government, when crypto hadn’t yet registered on most politicians’ radar. The DC veteran, who was nominated for the Commission by President Obama and then named as chair by President Trump, offered his view on why crypto has become a political football. “Politics is politics, and politics abhors a vacuum,” he said. “What one party gradually comes to disdain and demagogue, the other party will champion.”
Giancarlo continued: “What one side calls up an army to suppress, the other side gradually builds a campaign to advance.”
The day after the Blockchain Summit, in what was viewed as a win for crypto, Democrats and Republicans in the Senate voted 60-38 to pass a bill overturning a controversial SEC rule that had hampered financial institutions wishing to offer digital asset custody services for their clients. The vote passed in defiance of a veto threat from the White House. Strange times indeed. —Mike Orcutt
ODDS/ENDS
“Crypto is Trump’s new weapon against Biden.” That was the headline on a provocative piece of Politico reporting that made the rounds last week. Trump told a crowd of crypto enthusiasts at Mar-a-Lago recently that they “better vote” for him because the Democrats “are very much against” the industry. That’s a 180-degree turnaround from the stance he articulated while in office. In 2019, he stated that he was “not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air.”
“Crypto voters will be heard this election,” billionaire and staunch Democrat Mark Cuban said in a “warning” to the Biden Administration. Cuban specifically called out SEC chair Gary Gensler. “All he has done is make it nearly impossible for legitimate crypto companies to operate, killing who knows how many businesses and ruining who knows how many entrepreneurs,” Cuban said.
Humanity Protocol, a startup developing a biometric-based decentralized identity application, has raised $30 million at a $1 billion valuation. It seems Sam Altman’s iris-scanning Worldcoin has a challenger.
China’s central bank digital currency, the e-CNY, has failed to catch on even now that some Chinese cities are using it to pay state employees. Most of these workers convert it to cash immediately, reports the South China Morning Post.
President Biden has ordered a Wyoming Bitcoin mining operation with ties to China to shut down, citing unspecified risks to national security. According to the New York Times, the mine is located a mile from an Air Force base that controls nuclear-armed intercontinental ballistic missiles. The Times had also reported in October that Microsoft, which operates a data center near the mine that supports the Defense Department, warned the government that the computing resources at the mine could let the Chinese “pursue full-spectrum intelligence collection operations.” 🤔🤔🤔
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